Proposal to tax nonprofits alarms Mass. charities
A collective groan rose from Lowell City Hall when Perkins Park, a 230-unit apartment complex on the Merrimack River, was recently bought by the University of Massachusetts Lowell, which plans to turn it into a dormitory.
The $61.5 million sale was a double blow: hundreds of residents will lose their apartments, and Lowell will lose $321,000 in annual property taxes because UMass is exempt from paying them.
“We were shocked. We were disappointed,” said Lowell City Councilor Rodney Elliott. “It left a bad taste in the mouth, and now we’ll have to make cuts to our budget, which has an impact on the services we could provide.”
The city is also fighting back. Dismayed by the financial impact of the sale, a Lowell legislator wants to force tax-exempt institutions across Massachusetts, such as nonprofits and schools, to pay property taxes in certain circumstances. The House of Representatives included the tax measure in an economic development bill it passed earlier in July.
The pushback from Lowell is the first time the cherished tax-exempt status of the state’s charitable community has been challenged so forcefully. And it has many Massachusetts nonprofits on edge.
To them, the tax proposal is an assault on a fundamental agreement they have with society: that in return for providing services that reduce the burden on government, they operate tax-free, preserving their revenue for charitable works. A coalition of 17 nonprofits and umbrella groups has sent a letter to legislators protesting this latest threat to their tax-free classification.
For years, some nonprofits — including in Lowell — have been making so-called payments in lieu of taxes, or PILOTs, to compensate for public services provided by the community, such as roads and policing. These payment are voluntarily, however, and nonprofit participation is uneven.
In Boston, for example, whose PILOT program is considered a national model, two-thirds of the city’s colleges paid less than the city requested in fiscal 2015. A few, including Boston College, paid nothing. BC does make a separate annual payment to Boston and Newton for municipal fire services.
In Lowell, the city’s recent appeal to nonprofits for voluntary payments has yielded only about $17,000; if forced to pay property taxes, they collectively would owe nearly $4 million.
As a result of that anemic response, Lowell and other communities are ditching the nice-guy approach and attempting to tax nonprofits outright.
Connecticut enacted a law last year requiring hospitals and universities to pay taxes on certain properties. Maine Governor Paul LePage has tried repeatedly to tax large nonprofits, so far without success.
And in New Jersey last year a tax court ordered a medical center to pay property taxes, ruling that “modern nonprofit hospitals are essentially legal fictions” because they are virtually identical to businesses, in part due to their often highly paid executives.
“There used to be one or two or three of these [attempts] every year, usually in the Northeast,” a region heavily dependent on property taxes, said David Thompson, vice president of public policy at the National Council of Nonprofits. “Now we see dozens of cities raising the question throughout the country.”
While these efforts usually target well-endowed, property-rich entities, some don’t spare small, low-budget organizations.
Woonsocket, R.I., for example, which has flirted with bankruptcy, recently stripped tax-exempt status from local civic groups, such as the Elks club, as well as a nonprofit called Haven of Grace, which works with disadvantaged women.
“The city’s financial situation is in such bad shape,” Woonsocket City Solicitor Michael Marcello said, “that every organization needs to be pitching in.”
That opinion is shared by Massachusetts Municipal Association executive director Geoff Beckwith.
“The new normal is that there’s always going to be tight finances at the local level,” Beckwith said, “and the extent to which nonprofits refuse to contribute will lead to either higher taxes on other taxpayers, or a deterioration in the services provided locally.”
Nonprofits mightily reject that argument, pointing out they make invaluable community contributions that are difficult to measure in dollars.
“Cities and towns are squeezed for revenue — I get that — but nonprofits are also squeezed, so why try to extract money that’s going to reduce services for the people we’re trying to help?” said Michael Weekes, chief executive of the Providers’ Council, the state’s largest trade association for human services providers. “This is a wide, sweeping attack on our tax-exempt status that we think is misguided and unfair.”
Although most taxation attempts have failed so far, the nonprofit sector is watching the Massachusetts proposal warily. “It is of great concern,” Thompson of the National Council of Nonprofits said, because it has advanced further than any similar previous legislation in the state.
The measure, backed by State Representative David Nangle, a Lowell Democrat, would require nonprofits that purchase property currently on tax rolls to pay declining taxes on it over four years, until the amount reduces to zero.
The bill that includes his amendment is being negotiated between House and Senate leaders, and Nangle said he doubts his idea will be approved before the current legislative session ends Sunday. If it isn’t, he plans to file a revised measure that would apply only to larger nonprofits, which could make it more palatable to other lawmakers.
“I’m trying to figure out a way to create some fairness and parity,” Nangle said, “and require nonprofits that have substantial assets and large real estate holdings to come to the table and help these cities and towns, which are in dire need of their real estate tax revenue.”
UMass Lowell does not participate in the city’s PILOT program and opposes efforts to tax nonprofits. But spokesman Jeff Cournoyer noted that the university pours millions of dollars each year into the local area, from parking leases to salaries to construction projects. He also noted that UMass has its own police and public works, among other in-house departments.
“I’m certainly not making the case that we don’t consume city services,” Cournoyer said, “but the contributions the university makes to the city, both direct and indirect, go above and beyond” what its tax bill would be.
This story has been updated to reflect a separate payment that Boston College makes to Newton and Boston for municipal fire services.